SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. ______________)
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary proxy statement
/ / Confidential, for use of the Commission only (as permitted by
Rule 14a-6(e)(2))
/ / Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12
Cylink Corporation
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transactions applies:
- ----------------------------------------------------------------------------
(2) Aggregate number of securities to which transactions applies:
- ----------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
- ----------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- ----------------------------------------------------------------------------
(5) Total fee paid:
- ----------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
- ----------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
- ----------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- ----------------------------------------------------------------------------
(3) Filing party:
- ----------------------------------------------------------------------------
(4) Date filed:
- ----------------------------------------------------------------------------
<PAGE>
CYLINK CORPORATION
Notice of Annual Meeting of Shareholders
To Be Held May 22, 1997
To the Shareholders of Cylink Corporation:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Cylink
Corporation, a California corporation (the "Company"), will be held at the
Sheraton Four Points Hotel, 1100 North Mathilda Avenue, Sunnyvale, California
94089, at 3:00 p.m., local time, on May 22, 1997, for the following purposes:
1. ELECTION OF DIRECTORS. To elect eight directors of the Company to
serve until the 1998 Annual Meeting of Shareholders or until their
successors are elected and qualified.
2. APPROVAL AND RATIFICATION OF THE CYLINK CORPORATION 1994 FLEXIBLE
STOCK INCENTIVE PLAN, AS AMENDED. To ratify and approve the Cylink
Corporation 1994 Flexible Stock Incentive Plan, as amended (the "1994
Plan") to (i) increase the number of shares of Common Stock reserved for
issuance thereunder by 2,000,000 shares, (ii) provide for discretionary
awards to the Company's outside directors and (iii) increase the maximum
number of shares that can be issued to any one employee under the 1994 Plan
to 1,000,000 shares.
3. APPROVAL OF AMENDMENT TO THE COMPANY'S BYLAWS. To approve an
amendment to the Company's Bylaws authorizing the Board of Directors to
approve loans to, and guarantee obligations of, officers of the Company.
4. RATIFICATION AND APPROVAL OF THE APPOINTMENT OF INDEPENDENT
AUDITORS. To ratify and approve the appointment of Price Waterhouse LLP as
the independent auditors for the Company for the fiscal year ending
December 31, 1997.
5. OTHER BUSINESS. To transact such other business as may properly come
before the Annual Meeting of Shareholders and any adjournment or
postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement which is attached hereto and made a part hereof.
The Board of Directors has fixed the close of business on April 2, 1997 as
the record date for determining the shareholders entitled to notice of and to
vote at the 1997 Annual Meeting of Shareholders and any adjournment or
postponement thereof.
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING OF SHAREHOLDERS IN
PERSON, YOU ARE URGED TO MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS
PROMPTLY AS POSSIBLE IN THE POSTAGE-PREPAID ENVELOPE PROVIDED TO ENSURE YOUR
REPRESENTATION AND THE PRESENCE OF A QUORUM AT THE ANNUAL MEETING. IF YOU SEND
IN YOUR PROXY CARD AND THEN DECIDE TO ATTEND THE ANNUAL MEETING TO VOTE YOUR
SHARES IN PERSON, YOU MAY STILL DO SO. YOUR PROXY IS REVOCABLE IN ACCORDANCE
WITH THE PROCEDURES SET FORTH IN THE PROXY STATEMENT.
By Order of the Board of Directors,
Fernand B. Sarrat
President and Chief Executive Officer
Sunnyvale, California
April __, 1997
<PAGE>
Mailed to Shareholders on or about April __, 1997
CYLINK CORPORATION
910 Hermosa Court
Sunnyvale, California 94086
PROXY STATEMENT
General Information
This Proxy Statement is furnished to the shareholders of Cylink
Corporation, a California corporation (the "Company"), in connection with the
solicitation by the Board of Directors of the Company (the "Board" or "Board of
Directors") of proxies in the accompanying form for use in voting at the 1997
Annual Meeting of Shareholders of the Company (the "Annual Meeting") to be held
on May 22, 1997, at the Sheraton Four Points Hotel, 1100 North Mathilda Avenue,
Sunnyvale, California 94089, at 3:00 p.m., local time, and any adjournment or
postponement thereof. The shares represented by the proxies received, properly
marked, dated, executed and not revoked will be voted at the Annual Meeting.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is exercised by delivering to the Company (to
the attention of Robert B. Fougner, the Company's Secretary) a written notice of
revocation or a duly executed proxy bearing a later date, or by attending the
Annual Meeting and voting in person.
Solicitation and Voting Procedures
The solicitation of proxies will be conducted by mail and the Company will
bear all attendant costs. These costs will include the expense of preparing and
mailing proxy materials for the Annual Meeting and reimbursements paid to
brokerage firms and others for their expenses incurred in forwarding
solicitation material regarding the Annual Meeting to beneficial owners of the
Company's Common Stock. The Company may conduct further solicitation personally,
by telephone or by facsimile through its officers, directors and regular
employees, none of whom will receive additional compensation for assisting with
such solicitation.
The close of business on April 2, 1997 has been fixed as the record date
(the "Record Date") for determining the holders of shares of Common Stock of the
Company entitled to notice of and to vote at the Annual Meeting. As of the close
of business on the Record Date, the Company had approximately 25,824,923 shares
of Common Stock outstanding and entitled to vote at the Annual Meeting. The
presence at the Annual Meeting of a majority of these shares of Common Stock of
the Company, either in person or by proxy, will constitute a quorum for the
transaction of business at the Annual Meeting. Each outstanding share of Common
Stock on the Record Date is entitled to one (1) vote on all matters. With
respect to the election of directors, a shareholder may cumulate his or her
votes, meaning that such shareholder can multiply the number of shares owned by
the number of board positions to be filled, and allocate such votes for all or
as many director-nominees as he or she may designate provided that if any
shareholder has given notice at the Annual Meeting of his or her intention to
cumulate votes prior to the voting then cumulative voting will apply only to
those candidates whose names have been placed in nomination prior to the voting.
If any one shareholder has given such notice, all shareholders may cumulate
their votes for candidates in nomination.
An automated system administered by the Company's transfer agent will
tabulate votes cast by proxy at the Annual Meeting and an officer of the Company
will tabulate votes cast in person at the Annual
1
<PAGE>
Meeting. Abstentions and broker non-votes are each included in the determination
of the number of shares present and voting, and each is tabulated separately. In
determining whether a proposal has been approved or a nominee has been elected
as a director, abstentions are counted as votes against a proposal or nominee.
For all proposals except Proposal No. 3 broker non-votes are not counted as
votes for or against a proposal or nominee. For Proposal No. 3 broker non-votes
are counted as votes against the proposal because that Proposal must be approved
by the affirmative vote of a majority of the outstanding shares of the Company's
Common Stock entitled to vote.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
As set by the Board of Directors pursuant to the Bylaws of the Company,
the authorized number of directors is set at nine. Eight directors will be
elected at the Annual Meeting to serve until the 1998 Annual Meeting of
Shareholders or until their successors are elected or appointed and qualified or
until the director's earlier resignation or removal. There will be one vacancy
on the Board. Effective August 19, 1996, Mr. Lewis C. Morris resigned as a
member of the Board and will not seek reelection. In the event that any nominee
of the Company is unable or declines to serve as a director at the time of the
Annual Meeting, the proxies will be voted for any nominee who shall be
designated by the present Board of Directors to fill the vacancy. In the event
that additional persons are nominated for election as directors, the proxy
holders intend to vote all proxies received by them in such a manner as will
assure the election of as many of the nominees listed below as possible, and, in
such event, the specific nominees to be voted for will be determined by the
proxy holders. The Board has no reason to believe that the persons named below
will be unable or unwilling to serve as a director, if elected. Each of the
eight nominees for director who receives the greatest number of votes will be
elected.
<TABLE>
Set forth below are the names, ages and certain biographical
information relating to the director nominees.
<CAPTION>
Name of Nominee Age Position with Company Director Since
- --------------- ---- --------------------- --------------
<S> <C> <C> <C>
Fernand B. Sarrat................... 46 President, Chief Executive Officer, Director 1996
Jimmy K. Omura...................... 56 Chief Technical Officer, Director 1984
Leo A. Guthart(2)................... 59 Chairman of the Board 1984
James H. Simons(2).................. 58 Director 1984
Howard L. Morgan(1)................. 51 Director 1995
Elwyn Berlekamp(1).................. 56 Director 1995
William W. Harris(1)................ 57 Director 1995
King W.W. Harris(2)................. 53 Director 1995
- ------------------------------------
<FN>
(1) Member of Audit Committee
(2) Member of Compensation Committee
</FN>
</TABLE>
Mr. Sarrat became the President, Chief Executive Officer and a Director
of the Company in November, 1996. Prior to joining the Company, Mr. Sarrat was
with IBM Corporation for over 20 years, most recently as General Manager of
Networking Computing Marketing & Services, and held such other positions as
General Manager of the Networked Application Services Division, the Assistant
General Manager of Marketing and Business Development, and General Manager of
Marketing and Services in the Midwest.
Dr. Omura co-founded the Company and served as its Vice President of
Research and Development since its inception in 1984 until December 1995. In
December 1995, Dr. Omura was appointed the Company's Chief Technical Officer. In
addition, Dr. Omura served as the Company's Chairman of the Board of Directors
from its inception through December 1995. Dr. Omura received a B.S. and an M.S.
in Electrical Engineering from the Massachusetts Institute of Technology and a
Ph.D. in Electrical Engineering from Stanford University.
2
<PAGE>
Dr. Guthart has served as a Director since the Company's inception in
1984. Since 1990, he has served as the Vice Chairman of Pittway Corporation (a
principal shareholder of the Company) and as the Chairman of the Ademco division
of Pittway Corporation. Dr. Guthart received an A.B. in Physics from Harvard
College and an M.B.A. and D.B.A. in Finance from Harvard Business School. Dr.
Guthart also serves as a Director of Pittway Corporation and AptarGroup, Inc.
and is a Trustee of the Acorn Investment Trust.
Dr. Simons became a Director of the Company in 1984. Since 1982, he has
served as the President and Chairman of Renaissance Technologies Corp. Dr.
Simons received a B.S. in Mathematics from the Massachusetts Institute of
Technology and a Ph.D. in Mathematics from the University of California,
Berkeley. Dr. Simons also serves as a Director on the Board of Franklin
Electronic Publishers, Inc., Numar Corp., Segue Software and Kentec Information
Systems.
Dr. Morgan served as a Director from 1985 to 1990 and became a Director
again in October 1995. He has served since June 1989 as the President of
ArcaGroup, Inc. a consulting and investment management company. He has also been
a general partner of Renaissance Partners, a venture capital partnership since
1982. Dr. Morgan received a B.S. in Physics from City College of New York and a
Ph.D in Operations Research from Cornell University. Dr. Morgan also serves as a
Director of Franklin Electronic Publishers, Inc., Quarterdeck Corporation, HDS
Network Systems, Inc., Integrated Circuit Systems, Inc., Unitronix Corporation,
Scan-Graphics Inc., and MetaTools, Inc.
Dr. Berlekamp co-founded the Company and served as a Director from 1985
to 1990. He became a Director again in October 1995. Since 1971, Dr. Berlekamp
has been a Professor of Mathematics at the University of California, Berkeley
and a visiting professor of Electrical Engineering and Computer Science at the
Massachusetts Institute of Technology. Dr. Berlekamp received a B.S., M.S. and
Ph.D. in Electrical Engineering from the Massachusetts Institute of Technology.
Dr. William W. Harris became a Director of the Company in December
1995. Dr. Harris has been a private investor and the Treasurer of KidsPac, a
political action committee for more than the past five years. He received a B.A.
in Psychology from Wesleyan University and a Ph.D. in Urban Studies from the
Massachusetts Institute of Technology. Dr. Harris also serves as a Director of
Pittway Corporation (a principal shareholder of the Company) and AptarGroup,
Inc.
Mr. King W.W. Harris became a Director of the Company in December 1995.
He has been President of Pittway Corporation (a principal shareholder of the
Company) since 1984 and Chief Executive Officer of Pittway Corporation since
1987. Mr. Harris received a B.A. in Economics from Harvard College and an M.B.A.
from Harvard Business School. Mr. Harris also serves as a director of
AptarGroup, Inc.
THE BOARD RECOMMENDS A VOTE FOR
THE ELECTION OF THE NOMINEES NAMED ABOVE
Relationships Among Directors or Executive Officers
There are no family relationships among any of the directors or
executive officers of the Company, except that Dr. William W. Harris and Mr.
King W.W. Harris are first cousins.
Meetings and Committees of the Board of Directors
During the fiscal year ended December 31, 1996, the Board met four
times in person and held three telephonic meetings. Mr. King W.W. Harris did not
participate in two of the telephonic meetings. All other directors attended no
fewer than 75% of all the meetings of the Board and its committees on which he
served after becoming a member of the Board. The Board has two committees, the
Audit Committee and the Compensation Committee.
The Board currently does not have a nominating committee or a committee
performing the functions of a nominating committee. Although there are no formal
procedures for shareholders to recommend nominations, the Board will consider
shareholder recommendations. Such recommendations should be addressed to Robert
B. Fougner, the Company's Secretary, at the Company's principal executive
offices.
3
<PAGE>
The Audit Committee, which held one meeting in the fiscal year ended
December 31, 1996, consisted of Drs. Harris, Morgan and Berlekamp. The Audit
Committee reviews and supervises the Company's financial controls, including
selection of the Company's auditors, reviewing the books and accounts of the
Company, meeting with the officers of the Company regarding the Company's
financial controls, acting upon recommendations of auditors and taking such
further action as the Audit Committee deems necessary to complete an audit of
the books and accounts of the Company, as well as other matters which may come
before it or as directed by the Board.
The Compensation Committee, which held one meeting in the fiscal year
ended December 31, 1996, consists of Drs. Simons and Guthart and Mr. King W.W.
Harris. The Compensation Committee reviews and approves the compensation and
benefits for the Company's executive officers, administers the Company's stock
incentive plan and performs such other duties as may from time to time be
determined by the Board.
Compensation of Directors
Upon becoming a member of the Board, directors who are not affiliates
of the Company ("Non-Employee Directors") receive options (the "Initial Option
Grants") to purchase 2,000 shares of Common Stock, and thereafter receive an
annual option grant (the "Annual Option Grants") to purchase 2,000 shares of
Common Stock. However, each Non-Employee Director in office as of December 13,
1995, by agreement with such Non-Employee Directors, will not receive Annual
Option Grants after the 1997, 1998 and 1999 annual meetings of shareholders.
Non-Employee Directors who are elected between annual meetings will receive a
ratable Annual Option Grant. If Proposal No. 2 is approved by the shareholders
of the Company, Non-Employee Directors will be eligible to receive discretionary
awards under the 1994 Plan. The Company's Non-Employee Directors receive a
$1,000 fee for each Board meeting attended and $1,000 for each committee meeting
attended that is not held in conjunction with a Board meeting. All Non-Employee
Directors are reimbursed for expenses incurred in connection with attending
meetings of the Board. Employee directors of the Company do not receive
compensation for their services as directors.
4
<PAGE>
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of February 28, 1997, for
(i) each person who is known by the Company to beneficially own more than 5% of
the Company's Common Stock, (ii) each of the Company's directors, (iii) each of
the officers appearing in the Summary Compensation Table below and (iv) all
directors and executive officers as a group.
<CAPTION>
Shares Beneficially Owned(1)
----------------------------
Directors, Executive Officers and 5% Shareholders Number Percent(2)
------------------------------------------------- ------ ----------
<S> <C> <C> <C>
Leo A. Guthart(3).................................................. 8,906,085 34.7%
King W.W. Harris(4)................................................ 8,608,705 33.5%
William W. Harris(5)............................................... 8,608,705 33.5%
Pittway Corporation(6)............................................. 8,606,085 33.5%
Kopp Investment Investment Advisors, Inc.(7)....................... 3,034,800 11.8%
James H. Simons(8)................................................. 2,789,330 10.9%
Bermuda Trust Company, as Trustee of the Lord Jim Trust(9)......... 1,748,605 6.8%
Jimmy K. Omura(10)................................................. 1,367,863 5.3%
Polychem Holdings(11).............................................. 1,038,105 4.0%
Lewis C. Morris.................................................... 832,231 3.2%
Elwyn Berlekamp(12)................................................ 305,488 1.2%
Leslie Nightingill(13)............................................. 204,864 *
Robert B. Fougner(14).............................................. 118,751 *
Harold S. Yang..................................................... 77,500 *
David M. Morris.................................................... 75,507 *
Howard L. Morgan(15)).............................................. 74,620 *
John Daws(16)...................................................... 23,750 *
Fernand W. Sarrat.................................................. --- *
All Executive officers and Directors as a group ( persons)(17)...
- --------------------
<FN>
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options held by that person that
are currently exercisable or exercisable within 60 days of February 28,
1997 are deemed outstanding. Such shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of each
other person. To the Company's knowledge, except as set forth in the
footnotes to this table and subject to applicable community property laws,
each person named in the table has sole voting and investment power with
respect to the shares set forth opposite such person's name.
(2) Percentage beneficially owned is based on 25,660,884 shares outstanding as
of February 28, 1997.
(3) Includes 8,606,085 shares beneficially owned by Pittway Corporation, of
which Dr. Guthart is a Vice Chairman. Dr. Guthart disclaims beneficial
ownership of such shares. Also includes 2,620 shares subject to options
exercisable within 60 days of February 28, 1997.
(4) Includes 8,606,085 shares beneficially owned by Pittway Corporation, of
which Mr. Harris is the President and Chief Executive Officer. Mr. Harris
disclaims beneficial ownership of such shares. Also includes 2,620 shares
subject to options exercisable within 60 days of February 28, 1997.
(5) Includes 8,606,085 shares beneficially owned by Pittway Corporation, of
which Dr. Harris is a Director. Dr. Harris disclaims beneficial ownership
of such shares. Also includes 2,620 shares subject to options exercisable
within 60 days of February 28, 1997.
(6) The address of Pittway Corporation is 200 South Wacker Drive, Suite E,
Chicago, Illinois 60606-5802.
(Footnotes continued on following page.)
5
<PAGE>
(Footnotes continued from previous page.)
(7) Based on a Schedule 13GA dated February 7, 1997, Kopp Investment Advisors,
Inc. has sole dispositive power with respect to 93,000 shares of the
Company's Common Stock, shared dispositive power with respect to 2,941,800
shares of the Company's Common Stock, sole voting power with respect to
262,500 shares of the Company's Common Stock and shared voting power with
respect to 50,000 shares of the Company's Common Stock. The address of
Kopp Investment Advisors, Inc. is 6600 France Avenue So., Suite 672,
Edina, MN 55435.
(8) Includes (a) 1,748,605 shares owned by Bermuda Trust Company, as Trustee
of the Lord Jim Trust (a trust of which Dr. Simons and the members of his
family are the beneficiaries), (b) 1,038,105 shares owned by Polychem
Holdings. Polychem Holdings has given Dr. Simons a revocable proxy,
allowing him to vote in his sole discretion all shares of the Company's
Common Stock held by Polychem Holdings; and (c) 2,620 shares subject to
options exercisable within 60 days of February 28, 1997.
(9) Bermuda Trust Company, as Trustee of the Lord Jim Trust, holds 1,748,605
shares of the Company's Common Stock in a trust of which Dr. James H.
Simons, a Director of the Company, and members of his immediate family are
the beneficiaries. The address of Bermuda Trust Company is Murdoch & Co.,
c/o Bermuda Trust Company Limited, Attn.: Susan Gibbons, Compass Point, 9
Bermudiana Road, Hamilton, HM11, Bermuda.
(10) Includes 480,000 shares held by Dr. Omura's children for whom he provides
financial support. Also includes 68,670 shares subject to options
exercisable within 60 days of February 28, 1997.
(11) Polychem Holdings has granted Dr. Simons a revocable proxy allowing him to
vote in his sole discretion all shares of the Company's Common Stock held
by it. The address of Polychem Holdings is Polychem Holdings, c/o Loeb,
Block, Wachsman & Selzer, 505 Park Avenue, New York, New York 10022.
(12) Includes 2,620 shares subject to options exercisable within 60 days of
February 28, 1997.
(13) Includes 6,004 shares subject to options exercisable within 60 days of
February 28, 1997.
(14) Includes 118,751 shares subject to options exercisable within 60 days of
February 28, 1997.
(15) Includes 2,620 shares subject to options exercisable within 60 days of
February 28, 1997.
(16) Includes 23,750 shares subject to options exercisable within 60 days of
February 28, 1997.
(17) Includes _______ shares indirectly held by Directors of the Company and
________ shares subject to options exercisable within 60 days of February
28, 1997.
</FN>
</TABLE>
PROPOSAL NO. 2
APPROVAL AND RATIFICATION OF THE CYLINK CORPORATION
1994 FLEXIBLE STOCK INCENTIVE PLAN, AS AMENDED
General
The Company's shareholders are being asked to approve amendments to the
Company's 1994 Plan. The proposed amendments to the 1994 Plan will (i) increase
the maximum aggregate number of shares available for the grant of incentive
stock options from 3,950,000 shares to 5,950,000 shares, (ii) provide for
discretionary awards to the Company's Non-Employee Directors, and (iii) increase
the maximum number of shares with respect to which options and stock
appreciation rights ("SARs") may be granted to any employee from 750,000 to
1,000,000 shares during the duration of the 1994 Plan.
The amendment to the 1994 Plan allowing for discretionary grants to
Non-Employee Directors corresponds to recent amendments promulgated by the
Securities and Exchange Commission (the "SEC") to Rule 16b-3 applicable to the
1994 Plan. The amendments increasing the overall limit and the individual option
and SAR limit will enable the Company to grant awards as needed to attract
employees. Other amendments have been made to the 1994 Plan and are described
below although such amendments
6
<PAGE>
do not need to be separately approved by the shareholders. The 1994 Plan is
intended to enhance the Company's ability to provide key employees with
meaningful awards and incentives commensurate with their contributions and
competitive with those offered by other employers, and to increase shareholder
value by further aligning the interests of key employees with the interests of
the Company's shareholders by providing an opportunity to benefit from stock
price appreciation that generally accompanies improved financial performance.
The Board of Directors believes that the Company's long term success is
dependent upon its ability to attract and retain superior individuals who, by
virtue of their ability and qualifications, make important contributions to the
Company.
The affirmative vote of a majority of the shares present in person or
by proxy at the Annual Meeting and entitled to vote is required for adoption of
Proposal No. 2. For purposes of the vote on Proposal No. 2, abstentions are
counted as votes against a proposal and broker non-votes will not be counted as
votes cast and will have no effect on the result of the vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL
OF THE AMENDMENTS TO THE 1994 PLAN
The following summary of the 1994 Plan, including the proposed
amendments, is subject in its entirety to the specific language of the 1994
Plan, a copy of which is available to any shareholder upon request.
General Description
The 1994 Plan was approved by the Board of Directors and shareholders
in February 1994. In January 1995, the Board of Directors and the shareholders
approved an amendment to the 1994 Plan to increase the number of shares
available for grant thereunder from 1,250,000 to 2,750,000. In October 1995, the
Board of Directors and the shareholders approved an amendment to the 1994 Plan
to increase the number of shares available for grant from 2,750,000 to
3,950,000. In November 1996 the Board of Directors approved an amendment to the
1994 Plan subject to shareholder approval to increase the number of shares
available for grant from 3,950,000 to 5,950,000. An additional number of shares
(126,200) became available for grant under the 1994 Plan due to a transfer of
shares from a prexisting Plan. The purposes of the 1994 Plan are to give the
Company's employees and others who perform substantial services to the Company
an incentive, through ownership of the Company's Common Stock, to continue in
service to the Company, and to help the Company compete effectively with other
enterprises for the services of qualified individuals. The 1994 Plan permits the
grant of "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") only to employees of the
Company or any parent or subsidiary corporation of the Company. Awards other
than incentive stock options may be granted to employees, directors and
consultants. As of April, 1997, the number of employees, directors and
consultants eligible to receive grants under the 1994 Plan was approximately 350
persons.
The 1994 Plan provides for the grant of (i) shares, (ii) an option, a
stock appreciation right ("SARs") or similar right with an exercise or
conversion privilege at a fixed or variable price related to the Common Stock
and/or the passage of time, the occurrence of one or more events, or the
satisfaction of performance criteria or other conditions, or (iii) any other
security with the value derived from the value of the Common Stock of the
Company or other securities issued by a related entity (collectively, the
"Awards"). Such Awards include, without limitation, options, SARs, sales or
bonuses of restricted stock, dividend equivalent rights ("DERs"), performance
units ("Performance Units") or performance shares ("Performance Shares"). (The
existing 1994 Plan does not provide for the grant of DERs, SARs, Performance
Units and Performance Shares).
Amendment to Increase Overall Limit. Under the 1994 Plan, the number of
shares available for grant on December 31, 1996 was 1,975,970, of which
approximately _________ shares were subject to options previously granted. Had
Proposal No. 2 been in effect on January 1, 1997, the number of shares available
for grant under the 1994 Plan would have been _________ shares.
Discretionary Grants to Non-Employee Directors. The following
summarizes the amendment to the 1994 Plan to reflect the recent amendments
promulgated by the SEC to Rule 16b-3 applicable to stock compensation plans
generally. The 1994 Plan is administered, with respect to grants to directors,
officers,
7
<PAGE>
consultants, and other employees, by the Administrator of the 1994 Plan, defined
as the Board or a committee designated by the Board. The committee will be
constituted in such a manner as to satisfy applicable laws, including Rule
16b-3, as recently amended. Prior to recent amendments to Rule 16b-3, a
committee member was prevented from serving on the committee, if during the
one-year period preceding appointment to the committee, such member received a
grant or award of equity securities under the 1994 Plan unless the award was
made pursuant to a non-discretionary formula award program. Recent amendments to
Rule 16b-3 allow committee members to serve on the committee and receive
discretionary awards. Consistent with the amendments to Rule 16b-3, the 1994
Plan as amended allows for discretionary grants to Non-Employee Directors.
Amendment to Individual Limit. The maximum number of shares with
respect to which options and SARs may be granted to an employee of the Company
during the term of the 1994 Plan, as amended is 1,000,000 shares per individual
(the existing 1994 Plan does not provide for the grant of SARs). The 1994 Plan
currently provides that the maximum number of shares with respect to which
options may be granted to an employee of the Company during the term of the 1994
Plan is 750,000 shares.
Other Terms and Amendments. The Board may at any time amend, suspend or
terminate the 1994 Plan. To the extent necessary to comply with applicable
provisions of federal securities laws, state corporate and securities laws, the
Code, the rules of any applicable stock exchange or national market system, and
the rules of any foreign jurisdiction applicable to Awards granted to residents
therein, the Company will obtain shareholder approval of any amendment to the
1994 Plan in such a manner and to such a degree as required.
Stock options granted under the 1994 Plan may be either incentive stock
options under the provisions of Section 422 of the Code, or non-qualified stock
options. Incentive stock options may be granted only to employees of the Company
or any parent or subsidiary corporation of the Company. Awards other than
incentive stock options may be granted to employees, directors and consultants.
Under the 1994 Plan, Awards may be granted to such employees, directors or
consultants who are residing in foreign jurisdictions as the Administrator may
determine from time to time (the existing 1994 Plan does not address the grant
of awards to such individuals).
The 1994 Plan authorizes the Administrator to select the employees,
directors and consultants of the Company to whom Awards may be granted and to
determine the terms and conditions of any Award; however the term of an
incentive stock option may not be for more than 10 years (or 5 years in the case
of incentive stock options granted to any grantee who owns stock representing
more than 10% of the combined voting power of the Company or any parent or
subsidiary corporation of the Company). The 1994 Plan authorizes the
Administrator to grant Awards at an exercise price determined by the
Administrator. In the case of incentive stock options, such price cannot be less
than 100% (or 110%, in the case of incentive stock options granted to any
grantee who owns stock representing more than 10% of the combined voting power
of the Company or any parent or subsidiary corporation of the Company) of the
fair market value of the Common Stock on the date the option is granted. The
exercise price is generally payable in cash or, in certain circumstances, with a
promissory note, with such documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of an Award and delivery to the
Company of the sale or loan proceeds required to pay the exercise price, or with
shares of Common Stock. The aggregate fair market value of the Common Stock with
respect to any incentive stock options that are exercisable for the first time
by an eligible employee in any calendar year may not exceed $100,000.
The Awards may be granted subject to vesting schedules and restrictions
on transfer and repurchase or forfeiture rights in favor of the Company as
specified in the agreements to be issued under the 1994 Plan. The Administrator
has the authority to accelerate the vesting schedule of Awards so that they
become fully vested, exercisable, and released from any restrictions on transfer
and repurchase or forfeiture rights in the event of a Corporate Transaction, a
Change in Control or a Subsidiary Disposition,
8
<PAGE>
each as defined in the 1994 Plan. Effective upon the consummation of the
Corporate Transaction, all outstanding Awards under the Plan will terminate
unless assumed by the successor company or its parent. In the event of a Change
in Control or a Subsidiary Disposition, each Award shall remain exercisable
until the expiration or sooner termination of the Award term. Such accelerated
vesting and release from restrictions on transfer and repurchase or forfeiture
rights is automatic and not subject to Administrator discretion in the case of
options and restricted stock issued to Non-Employee Directors under the formula
award provisions of the existing 1994 Plan. The amended 1994 Plan also permits
the Administrator to include a provision whereby the grantee may elect at any
time while an employee, director or consultant to exercise any part or all of
the unvested Award prior to full vesting (the existing 1994 Plan does not permit
awards to include an early exercise provision).
Under the 1994 Plan, incentive stock options may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised during the
lifetime of the grantee only by the grantee. However, the 1994 Plan permits the
designation of beneficiaries by holders of incentive stock options (the existing
1994 Plan does not address such beneficiary designations). Other Awards are
transferable to the extent provided in the Award agreement.
Under the 1994 Plan, the Administrator may establish one or more
programs under the 1994 Plan to permit selected grantees the opportunity to
elect to defer receipt of consideration payable under an Award. The
Administrator also may establish under the 1994 Plan separate programs for the
grant of particular forms of Awards to one or more classes of grantees. (These
programs may not be established under the existing 1994 Plan.)
Certain Federal Tax Consequences
The following summarizes only the federal income tax consequences of
stock options and shares of restricted stock granted under the 1994 Plan. State
and local tax consequences may differ.
The grant of a non-qualified stock option under the 1994 Plan will not
result in any federal income tax consequences to the optionee or to the Company.
Upon exercise of a non-qualified stock option, the optionee is subject to income
taxes at the rate applicable to ordinary compensation income on the difference
between the option price and the fair market value of the shares on the date of
exercise. This income is subject to withholding for federal income and
employment tax purposes. The Company is entitled to an income tax deduction in
the amount of the income recognized by the optionee. Any gain or loss on the
optionee's subsequent disposition of the shares of Common Stock will receive
long or short-term capital gain or loss treatment, depending on whether the
shares are held for more than twelve months following exercise. The Company does
not receive a tax deduction for any such gain. Capital gains currently are taxed
at the same rates as ordinary income, except that the maximum marginal rate at
which ordinary income is taxed to individuals is currently 39.6% and the maximum
rate at which long-term capital gains are taxed is 28%.
The grant of an incentive stock option under the 1994 Plan will not
result in any federal income tax consequences to the optionee or to the Company.
An optionee recognizes no federal taxable income upon exercising an incentive
stock option ("ISO") (subject to the alternative minimum tax rules discussed
below), and the Company receives no deduction at the time of exercise. In the
event of a disposition of stock acquired upon exercise of an ISO, the tax
consequences depend upon how long the optionee has held the shares of Common
Stock. If the optionee does not dispose of the shares within two years after the
ISO was granted, nor within one year after the ISO was exercised and shares were
purchased, the optionee will recognize a long-term capital gain (or loss) equal
to the difference between the sale price of the shares and the exercise price.
The Company is not entitled to any deduction under these circumstances.
If the optionee fails to satisfy either of the foregoing holding
periods, he or she must recognize ordinary income in the year of the disposition
(referred to as a "disqualifying disposition"). The amount of such ordinary
income generally is the lesser of (i) the difference between the amount realized
on disposition and the exercise price, or (ii) the difference between the fair
market value of the stock on the
9
<PAGE>
exercise date and the exercise price. Any gain in excess of the amount taxed as
ordinary income will be treated as a long or short-term capital gain, depending
on whether the stock was held for more than twelve months. The Company, in the
year of the disqualifying disposition, is entitled to a deduction equal to the
amount of ordinary income recognized by the optionee.
The "spread" under an ISO -- i.e., the difference between the fair
market value of the shares at exercise and the exercise price -- is classified
as an item of adjustment in the year of exercise for purposes of the alternative
minimum tax.
The grant of restricted stock will subject the recipient to ordinary
compensation income on the difference between the amount paid for such stock and
the fair market value of the shares on the date that the restrictions lapse.
This income is subject to withholding for federal income and employment tax
purposes. The Company is entitled to an income tax deduction in the amount of
the income recognized by the recipient. Any gain or loss on the recipient's
subsequent disposition of the shares will receive long or short-term capital
gain or loss treatment depending on whether the shares are held for more than
twelve months and depending on how long the stock has been held since the
restrictions lapsed. The Company does not receive a tax deduction for any such
gain. Recipients of restricted stock may make an election under Internal Revenue
Code Section 83(b) ("Section 83(b) Election") to recognize as ordinary
compensation income in the year that such restricted stock is granted the amount
equal to the spread between the amount paid for such stock and the fair market
value on date of the issuance of the stock. If the Section 83(b) Election is
made, the recipient recognizes no further amounts of compensation income upon
the lapse of any restrictions and any gain or loss on subsequent disposition
will be long or short-term capital gain. The Section 83(b) Election must be made
within thirty days from the time the restricted stock is issued.
Amended Plan Benefits
Of the options granted in 1996, options to purchase 1,000,000 shares of
the Company's Common Stock at an exercise price of $11.00 per share were granted
to Fernand B. Sarrat. If Proposal No. 2 is not approved by the shareholders,
neither the maximum number of shares that may be issued pursuant to the 1994
Plan nor the maximum number of shares that an individual can receive will be
increased. Therefore, of the options to purchase 1,000,000 shares granted to Mr.
Sarrat, 250,000 shares would be in excess of the existing individual limit and
would be rescinded retroactive to the date of grant. As to any shares rescinded,
the Administrator may determine that the value of the rescinded options may be
provided alternatively in cash, restricted stock or other consideration. Except
as stated above, as of the date of this Proxy Statement, no other Named
Executive Officer, Director, officer or employee of the Company has been granted
an Award under the 1994 Plan subject to shareholder approval of the amendments
to the 1994 Plan. The benefits to be received pursuant to the 1994 Plan by the
Company's Directors, officers and employees are not determinable at this time.
PROPOSAL NO. 3
APPROVAL OF AN AMENDMENT TO THE COMPANY'S BYLAWS
The Company's shareholders are being asked to approve an amendment to
the Company's Bylaws which would grant the Board of Directors the authority to
approve loans to, and guarantee obligations of, officers of the Company.
The Company's Board of Directors believes that it is in the best
interests of the Company and its shareholders to approve the amendment to the
Company's Bylaws. The current competitive job market for qualified candidates
has made it necessary for the Company to look outside the local area in
California for qualified candidates and to provide financial assistance in the
form of relocation loans to enable such candidates to secure local housing.
California law requires, with certain exceptions, that loans to, and guarantees
of obligations of, officers of
10
<PAGE>
the Company either be approved by shareholders or by the Board alone provided
that the Company's Bylaws grant the Board the authority to act alone and the
Company has at least 100 shareholders of record. On April 1, 1997, the Company
had 143 shareholders of record (persons holding shares in the name of a nominee
are not considered in this number). The proposed amendment to the Company's
Bylaws will authorize the Board of Directors to make certain loans to, and
guarantee obligations of, officers and officer candidates to assist with
expenses incurred in relocating and obtaining suitable housing.
The Board of Directors propose that the following language be added as
Section 3.12 to the Company's Bylaws:
"The corporation may, upon approval of the Board of Directors
alone, make loans of money or property to, or guarantee the obligations
of, any officer (whether or not a director) of the corporation or of
its parent, or adopt an employee benefit plan authorizing such loans or
guarantees provided that:
(1) the Board of Directors determines that such a loan,
guaranty, or plan may reasonably be expected to benefit the
corporation;
(2) the corporation has outstanding shares held of record
by 100 or more persons (determined as provided in Section 605
of the General Corporation Law) on the date of approval by the
Board of Directors;
(3) the approval by the Board of Directors is by a vote
sufficient without counting the vote of any interested
director(s); and
(4) the loan is otherwise made in compliance with Section
315 of the General Corporation Law."
Upon approval by the shareholders of the proposed amendment to the
Company's Bylaws, the Board of Directors will ratify a loan made to Fernand B.
Sarrat in connection with his relocation. See "Employment Agreements."
The affirmative vote of a majority of the outstanding shares of the
Company entitled to vote as of the record date is required for adoption of
Proposal No. 3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL
OF THE AMENDMENT OF THE COMPANY'S BYLAWS.
PROPOSAL NO. 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Price Waterhouse LLP has served as the Company's independent auditors
since 1994 and has been appointed by the Board to continue as the Company's
independent auditors for the Company's fiscal year ending December 31, 1997. In
the event that ratification of this selection of auditors is not approved by a
majority of the shares of Common Stock voting at the Annual Meeting in person or
by proxy, management will review its future selection of auditors. A
representative of Price Waterhouse LLP is expected to be present at the Annual
Meeting. The representative will have an opportunity to make a statement and to
respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF
THE APPOINTMENT OF PRICE WATERHOUSE LLP AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR
ENDING DECEMBER 31, 1997.
11
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
<TABLE>
Summary Compensation Table
The following table sets forth certain information concerning
compensation of (i) each person that served as the Company's Chief Executive
Officer during the last fiscal year of the Company, (ii) the four other most
highly compensated executive officers of the Company, and (iii) up to two former
executive officers of the Company who would have been one of the Company's four
most highly compensated executive officers had such officer been serving as such
at the end of the Company's last fiscal year (collectively, the "Named Executive
Officers"):
<CAPTION>
Long-Term
Annual Compensation Compensation
- ---------------------------------- ---------------------------------------- ----------------
Securities
Underlying All Other
Name and Principal Position Year(1) Salary($)(2) Bonus($) Options(#) Compensation($)
--------------------------- ------- ------------ -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Fernand B. Sarrat,(2) 1996 $ 32,308 $ 500 1,000,000
President, Chief Executive
Officer and Director
Lewis C. Morris,(3) 1996 89,423 7,750(7) $85,950(9)
Former President, Chief
Executive Officer and Director
Jimmy K. Omura, 1996 150,000 33,057(8) 15,000(10)
Chief Technical Officer and
Director
Leslie Nightingill, 1996 150,000 500 ---
Vice President, Engineering
John Daws, 1996 143,462 500 25,000 ---
Vice President and Chief
Financial Officer
Robert B. Fougner, 1996 135,000 ---
General Counsel and Secretary
David M. Morris,(4) 1996 143,409(6) 500 26,860(11)
Former Vice President, Sales
and Marketing
Harold S. Yang,(5) 1996 154,038 500 5,625(12)
Former Vice President
Engineering
- ---------------------
<FN>
(1) The Company became a reporting company under the Securities Exchange Act
in 1996.
(2) Mr. Sarrat commenced employment with the Company on November 6, 1996. His
annualized salary for 1996 was $300,000.
(3) Mr. Lewis C. Morris resigned his employment with the Company on July 25,
1996.
(4) Mr. David M. Morris was separated from his employment with the Company
effective December 31, 1996.
(5) Mr. Yang was separated from his employment with the Company on December
31, 1996.
(6) Includes commissions of $37,794.
(7) The amount of the performance bonus to be paid pursuant to the terms of
Mr. Lewis C. Morris's employment agreement for services during 1996 is
under review, but in no event will it exceed 2.25% of the Company's
pre-tax profit for 1996 ($32,557).
(8) Includes performance bonus of $32,557 to be paid pursuant to terms of Dr.
Omura's employment agreement.
(9) Includes life insurance and disability premiums of $47,980 and payments of
$37,970 to be paid pursuant to Mr. Morris's employment agreement.
(10) Represents life insurance premiums.
(11) Represents accrued vacation benefits of $26,709 payable on termination of
employment and life insurance premiums of $151.
(12) Represents accrued vacation benefits payable on termination of employment.
</FN>
</TABLE>
12
<PAGE>
Employment Agreements
The Company has from time to time entered into employment, retention
and severance arrangements with certain of its executive officers which are
described in the following paragraphs.
The Company has entered into an employment agreement (the "Sarrat
Agreement") dated November 6, 1996 with Fernand B. Sarrat, the Company's
President and Chief Executive Officer for an initial term which expires on
December 31, 2001 (the "Initial Term") and which automatically renews for
additional one-year periods unless terminated. Under the Sarrat Agreement, Mr.
Sarrat shall receive an annual salary of $300,000 and an annual performance
bonus of not less than $100,000. Pursuant to the terms set forth in the Sarrat
Agreement, the Company loaned Mr. Sarrat approximately $2,000,000 (the "Housing
Loan") towards the purchase of a residence in California commensurate with his
prior residence in Westport, Connecticut; the Housing Loan is secured by a deed
of trust on Mr. Sarrat's California residence. The Housing Loan is interest free
and principal payments shall not be due until January 1, 2001 at which time it
shall convert into, and become subject to, the terms of a standard,
interest-bearing commercial loan described in the Sarrat Agreement. In the event
that Mr. Sarrat remains continuously employed with the Company through December
31, 2000, he shall be eligible to receive a special bonus of $2,000,000 to be
applied against any outstanding balance of the Housing Loan and, upon completion
of the Initial Term, the outstanding balance of the Housing Loan shall be
reduced to reflect a decrease (if any) in the fair market value of Mr. Sarrat's
California residence. The Sarrat Agreement also provides for acceleration of the
repayment of the Housing Loan in the event of Mr. Sarrat's termination of
employment prior to expiration of the Initial Term. The Sarrat Agreement
provides that the Company shall also grant Mr. Sarrat options to purchase
1,000,000 shares of the Company's Common Stock under the 1994 Plan at an
exercise price of $11.00 per share; however, under the terms of the Sarrat
Agreement, 250,000 of the options remain subject to shareholder approval as
provided in Proposal No. 2 of this Proxy Statement. The options have a ten-year
term and shall vest as follows: (i) 20% of the options shall vest upon the first
anniversary of the grant date, and (ii) the remainder of the options shall vest
in equal monthly installments over the succeeding four years. All or a portion
of the options granted to Mr. Sarrat under the Agreement shall immediately vest
upon the happening of certain specified events defined therein, including a
change of control of the Company, termination of Mr. Sarrat's employment without
cause or good reason, or due to death or disability. In addition, under the
Sarrat Agreement the Company is obligated to reimburse Mr. Sarrat for the amount
of insurance premiums paid on two term life insurance policies, moving expenses
and closing costs associated with his change of residence, annual property taxes
and homeowner's insurance premiums on his California residence up to an
aggregate of $42,000 per year, long-term disability insurance providing coverage
of not less than $333,350 per year, and reimbursement of income taxes owed on
certain of the foregoing benefits. Mr. Sarrat has agreed not to compete with or
engage in any activities that will conflict with the business of the Company
during, and for two years after, his termination of employment, and not to
solicit employees or customers of the Company for a one-year period following
termination of employment.
The Company entered into an employment agreement (the "Omura
Agreement"), dated April 1, 1989, with Jimmy K. Omura, Chief Technical Officer
and Director. The Omura Agreement has an initial term of five years, and is
automatically renewable for successive two-year terms unless the Board of
Directors, in its discretion, decides not to renew the Omura Agreement. In the
Omura Agreement, Dr. Omura has agreed not to compete with or engage in any
activities that will conflict with the business of the Company during his period
of employment and for two years following the termination of his employment.
Such provisions may not be enforceable under California law. The Omura Agreement
also provides for a performance bonus payment to Dr. Omura in an amount equal to
two and one quarter percent (2.25%) of the Company's yearly pre-tax profit,
which amount is payable in equal installments over five years. In the event that
the Company is acquired, the Omura Agreement also provides for a one-time cash
payment to Dr. Omura equal to one-half percent (.5%) of the acquisition price.
The Omura Agreement also provides that, as long as Dr. Omura (or his estate) has
a three percent or greater equity ownership in the Company, he (or his trustee)
has the right to maintain a seat on the Board of Directors or any surviving
business entity. Dr. Omura currently has a 5.3% equity ownership in the Company.
The Company entered into an employment agreement (the "Morris
Agreement"), dated April 1, 1989, with Lewis C. Morris, former President, Chief
Executive Officer and Director of the Company. The Morris Agreement had an
initial term of five years and was renewable for successive two-year terms. Mr.
Morris resigned his positions with the Company effective August 19, 1996. Mr.
Morris has agreed not to compete with or engage in any activities that will
conflict with the business of the Company for two years following the
termination of his employment. Such agreement may not be enforceable under
California law. Under the terms of Morris Agreement, the Company is under an
obligation to pay Mr. Morris the dollar amount of the difference between the
amount of Mr. Morris's salary at the time of his resignation, $150,000, and the
amount of the long-term disability payments received by Mr. Morris. The
Agreement also provides for a performance bonus payment to Mr. Morris in an
amount equal to two and one quarter percent (2.25%) of the Company's yearly
pre-tax profit during the period of his employment, which amount is payable in
equal installments over five years.
In April 1995, the Company agreed to loan David M. Morris the principal
amount of $120,000 in connection with his relocation from New Jersey to
California. Mr. Morris was a Vice President of the Company until December 31,
1996. The loan bears interest at an annual rate of 9%. The largest amount
outstanding under this loan in 1996 was $108,558. Of this amount, $60,000 in
principal and $922 in interest were repaid in 1996 upon the sale of Mr. Morris'
New Jersey residence. The remaining $60,000
13
<PAGE>
was to be forgiven ratably over three years after Mr. Morris provided a second
deed of trust on his California home and further provided that the forgiveness
would cease after he left the Company's employment. As of December 31, 1996,
$28,522 of principal and $_______ in interest remains outstanding under the
loan.
<TABLE>
Option Grants in Last Fiscal Year
The following table provides certain information with respect to stock
options granted to the Named Executive Officers during the fiscal year ended
December 31, 1996. In addition, as required by the Securities and Exchange
Commission rules, the table sets forth the potential realizable value over the
term of the option (the period from the date of grant to the expiration date)
based on assumed rates of stock appreciation of 5% and 10%, compounded annually.
These amounts are based on certain assumed rates of appreciation and do not
represent the Company's estimate of future stock value. Actual gains, if any, on
stock option exercises will be dependent on the future performance of the Common
Stock.
<CAPTION>
Individual Grants
--------------------------------------------------------
Potential Realizable
Number of % of Total Value at Assumed
Securities Options Exercise Annual Rate of Stock
Underlying Granted to Price Price Appreciation for
Options Employees in Per Share Expiration Option Term(5)
Name Granted (#) Fiscal Year(2) ($/Sh)(3) Date (4) 5% ($) 10% ($)
----- ------------- -------------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Fernand B. Sarrat..... 1,000,000(1) 48.9% $11.00 11/06/06 $6,816,035 $17,369,058
Lewis C. Morris....... -- -- -- -- -- --
Jimmy K. Omura........ -- -- -- -- -- --
Leslie Nightingill.... -- -- -- -- -- --
John Daws............. 25,000 1.2% 23.50 02/28/06 369,476 936,324
Robert B. Fougner..... -- -- -- -- -- --
David M. Morris....... -- -- -- -- -- --
Harold S. Yang........ -- -- -- -- -- --
- -------------------------------
<FN>
(1) The options were granted pursuant to the Company's 1994 Plan, of which
250,000 shares are subject to approval of Proposal No. 2 by the
shareholders of the Company.
(2) Based on a total of 2,042,810 options granted to employees of the Company
in 1996, including the Named Executive Officers.
(3) All options were granted at an exercise price equal to the fair market
value based on the closing market value of a share of the Company's Common
Stock on the Nasdaq National Market on the date the options were granted.
(4) The options granted to individuals owning less than 10% of the outstanding
shares of the Company's Common Stock have a term of ten years subject to
earlier termination upon the occurrence of certain events related to
termination of employment. Options granted to individuals owning 10% or
more of the shares of the Company's outstanding Common Stock have a term
of five years.
(5) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated by assuming that
the stock price on the date of grant appreciates at the indicated annual
rate, compounded annually for the entire term of the option, and that the
option is exercised and sold on the last day of its term for the
appreciated stock price. There can be no assurance that the amounts
reflected in this table will be achieved.
</FN>
</TABLE>
14
<PAGE>
<TABLE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
The following table sets forth certain information with respect to
stock options exercised by the Named Executive Officers during fiscal year 1996,
including the aggregate value of gains on the date of exercise. In addition, the
table sets forth the number of shares covered by stock options as of December
31, 1996, and the value of "in-the-money" stock options, which represent the
positive spread between the exercise price of a stock option and the market
price of the shares subject to such option on December 31, 1996.
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at December 31, 1996 (#) at December 31, 1996 ($)(2)
------------------------------ ------------------------------
Shares
Acquired on Value
Name Exercise (#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
----------------------- ---------- --------------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Fernand B. Sarrat -- -- -- 1,000,000 -- $2,125,000
Lewis C. Morris 70,490 $696,358 -- -- -- --
Jimmy K. Omura -- -- -- -- -- --
Leslie Nightingill 9,000 89,250 2,494 31,154 $ 28,452 351,793
John Daws -- -- 16,667 58,333 139,063 417,188
Robert B. Fougner 10,000 120,000 111,531 51,759 1,284,998 584,925
David M. Morris 47,250 467,950 22,384 -- 249,222 --
Harold S. Yang 5,000 38,125 70,833 -- 792,183 --
- ------------------------
<FN>
(1) Calculated by determining the difference between the fair market value
of the securities underlying the option on the date of exercise and the
exercise price of the Named Executive Officers' respective options.
(2) Calculated by determining the difference between the fair market value
of the securities underlying the option at December 31, 1996 ($13.125
per share) and the exercise price of the Named Executive Officers'
respective options.
</FN>
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
This section is not "soliciting material," is not deemed "filed" with
the Commission and is not incorporated by reference in any filing of the Company
under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended, whether made before or after the date hereof and irrespective
of any general language to the contrary.
The Compensation Committee of the Board was formed in December 1995 and
consists of Drs. Simons and Guthart and Mr. King W.W. Harris. Decisions
concerning the compensation of the Company's executive officers are made by the
Compensation Committee and reviewed periodically by the full Board (excluding
any interested director).
Executive Officer Compensation Programs
The objectives of the executive officer compensation programs are to
attract, retain, motivate and reward key personnel who possess the necessary
leadership and management skills, through competitive base salary, annual cash
bonus incentives, long-term incentive compensation in the form of stock options,
and various benefits, including medical and life insurance plans.
The executive compensation policies of the Compensation Committee are
intended to combine competitive levels of compensation and rewards for above
average performance and to align relative compensation with the achievements of
key business objectives, optimal satisfaction of customers, and maximization of
shareholder value. The Compensation Committee believes that stock ownership by
management is beneficial in aligning management and shareholder interests,
thereby enhancing shareholder value.
15
<PAGE>
Base Salaries. Salaries for the Company's executive officers are
determined primarily on the basis of the executive officer's responsibility,
general salary practices of peer companies and the officer's individual
qualifications and experience. Among other sources of information, the
Compensation Committee relies on reports from Radford Associates concerning
competitive compensation practices in the Company's geographical region. The
base salaries are reviewed annually and may be adjusted by the Compensation
Committee in accordance with certain criteria which include individual
performance, the functions performed by the executive officer, the scope of the
executive officer's on-going duties, general changes in the compensation peer
group in which the Company competes for executive talent, and the Company's
financial performance generally. The weight given each such factor by the
Compensation Committee may vary from individual to individual.
Incentive Bonuses. The Compensation Committee believes that a cash
incentive bonus plan can serve to motivate the Company's executive officers and
management to address annual performance goals, using more immediate measures
for performance than those reflected in the appreciation in value of stock
options. The bonus amounts are based upon recommendations by management and a
subjective consideration of factors including such officer's level of
responsibility, individual performance, contributions to the Company's success
and the Company's financial performance generally.
Stock Option Grants. Stock options are granted to executive officers
and other employees under the 1994 Plan. Because of the direct relationship
between the value of an option and the stock price, the Compensation Committee
believes that options motivate executive officers to manage the Company in a
manner that is consistent with shareholder interests. Stock option grants are
intended to focus the attention of the recipient on the Company's long-term
performance which the Company believes results in improved shareholder value,
and to retain the services of the executive officers in a competitive job market
by providing significant long-term earning potential. To this end, stock options
generally vest and become fully exercisable over a five-year period. The
principal factors considered in granting stock options to executive officers of
the Company are prior performance, level of responsibility, other compensation
and the executive officer's ability to influence the Company's long-term growth
and profitability. However, the 1994 Plan does not provide any quantitative
method for weighting these factors, and a decision to grant an award is
primarily based upon a subjective evaluation of the past as well as future
anticipated performance.
Deductibility of Compensation. Section 162(m) of the Code disallows a
deduction by the Company for certain compensation exceeding $1 million paid to
any named executive officer, excluding, among other things, certain performance
based compensation. Because the compensation figures for the Named Executive
Officers have not approached the limitation, the Compensation Committee has not
had to use any of the available exemptions from the deduction limit. However,
the 1994 Plan is designed to qualify any compensation realized by Named
Executive Officers from the exercise of an option as performance based
compensation. The Compensation Committee remains aware of the existence of the
Code Section 162(m) limitations, and the available exemptions, and will address
the issue of deductibility when and if circumstances warrant the use of such
exemptions in addition to the exemption contemplated under the 1994 Plan.
Chief Executive Officer Compensation
The compensation of the Chief Executive Officer is reviewed annually on
the same basis as discussed above for all executive officers. Mr. Sarrat's base
salary on an annualized basis for the fiscal year ended December 31, 1996 was
$300,000. During negotiations in November 1996 concerning Mr. Sarrat's
employment contract, his base salary was established in part by comparing the
base salaries of chief executive officers at other companies of similar size and
the compensation proposals by competing candidates for the position of Chief
Executive Officer. Mr. Sarrat's base salary was at the approximate median of the
base salary range for Presidents/Chief Executive Officers of comparative
companies. Mr. Sarrat received an option grant under the 1994 Plan covering
1,000,000 shares of Common Stock during the fiscal year ended December 31, 1996.
Such option grant is subject to the approval of the amendment to the 1994 Plan
by the shareholders. In addition, Mr. Sarrat was granted an
16
<PAGE>
interest-free loan in the amount of $2,000,000, subject to shareholder approval
of an amendment to the Company's Bylaws, for the purchase of a primary residence
in Northern California in order to accommodate his relocation from his current
residence in Connecticut to the Company's place of business where housing costs
are significantly greater. In the event Mr. Sarrat remains in the Company's
employment until December 31, 2000, he is entitled to a bonus of $2,000,000
which will be applied against the outstanding balance of the loan.
MEMBERS OF THE COMPENSATION COMMITTEE
Leo A. Guthart
James H. Simons
King W.W. Harris
17
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the percentage change in the cumulative
total shareholder return on the Company's Common Stock from February 15, 1996,
the date of the Company's initial public offering, through the end of the
Company's fiscal year ended December 31, 1996, with the percentage change in the
cumulative total return for the Nasdaq Composite Index and the Hambrecht and
Quist Technology Index. The comparison assumes an investment of $100 on February
15, 1996 in the Company's Common Stock and in each of the foregoing indices and
assumes reinvestment of dividends. The stock performance shown on the graph
below is not necessarily indicative of future price performance.
[The following descriptive data is supplied in accordance with Rule 304(d) of
Regualtion S-T]
2/15/96 12/31/96
------- --------
Cylink Corporation 100 88
NASDAQ Composite Index 100 118
Hambrecht & Quist Technology Index 100 119
18
<PAGE>
SHAREHOLDER PROPOSALS
To be considered for presentation to the annual meeting of the
Company's shareholders to be held in 1998, a shareholder proposal must be
received by Robert B. Fougner, Secretary, Cylink Corporation, 910 Hermosa Court,
Sunnyvale, California 94086, no later than December __, 1997.
OTHER MATTERS
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and persons who own more than 10% of the Company's Common
Stock (collectively, "Reporting Persons") to file reports of ownership and
changes in ownership of the Company's Common Stock. Reporting Persons are
required by Securities and Exchange Commission regulations to furnish the
Company with copies of all Section 16(a) reports they file. Based solely on its
review of the copies of such reports received or written representations from
certain Reporting Persons, the Company believes that during the fiscal year
ended December 31, 1996, all Reporting Persons complied with all applicable
filing requirements.
Other Matters
The Board of Directors knows of no other business which will be
presented at the Annual Meeting. If any other business is properly brought
before the Annual Meeting, it is intended that proxies in the enclosed form will
be voted in respect thereof in accordance with the judgments of the persons
voting the proxies.
It is important that the proxies be returned promptly and that your
shares be represented. Shareholders are urged to mark, date, execute and
promptly return the accompanying proxy card in the enclosed envelope.
By Order of the Board of Directors,
Fernand B. Sarrat
President and Chief Executive Officer
April __, 1997
Sunnyvale, California
19
<PAGE>
Appendix A
CYLINK CORPORATION
1994 FLEXIBLE STOCK INCENTIVE PLAN
(amended and restated as of April 2, 1997)
1. Purposes of the Plan. The purposes of this Stock Incentive Plan are
to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business.
2. Definitions. As used herein, the following definitions shall apply:
(a.) "Administrator" means the Board or any of the Committees
appointed to administer the Plan. All references to the "Committee" in any Award
Agreement shall be deemed to refer to the Administrator.
(b.) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange
Act. All references to "Affiliate" in any Award Agreement issued prior to this
April 2, 1997 amendment and restatement of the Plan shall be deemed to refer to
a Parent or a Subsidiary.
(c.) "Applicable Laws" means the legal requirements relating
to the administration of stock incentive plans, if any, under applicable
provisions of federal securities laws, state corporate and securities laws, the
Code, the rules of any applicable stock exchange or national market system, and
the rules of any foreign jurisdiction applicable to Awards granted to residents
therein.
(d.) "Award" means the grant of an Option, Restricted Stock,
SAR, Dividend Equivalent Right, Performance Unit, Performance Share, or other
right or benefit under the Plan.
(e.) "Award Agreement" means the written agreement evidencing
the grant of an Award executed by the Company and the Grantee, including any
amendments thereto.
(f.) "Board" means the Board of Directors of the Company.
(g.) "Change in Control" means a change in ownership or
control of the Company effected through either of the following transactions:
(i.) the direct or indirect acquisition by any person
or related group of persons (other than an acquisition from or by the Company or
by a Company-
1
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of April, 1997
sponsored employee benefit plan or by a person that directly or indirectly
controls, is controlled by, or is under common control with, the Company) of
beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of
securities possessing more than fifty percent (50%) of the total combined voting
power of the Company's outstanding securities pursuant to a tender or exchange
offer made directly to the Company's shareholders which a majority of the
Continuing Directors who are not Affiliates or Associates of the offeror do not
recommend such shareholders accept, or
(ii.) a change in the composition of the Board over a
period of thirty-six (36) months or less such that a majority of the Board
members (rounded up to the next whole number) ceases, by reason of one or more
contested elections for Board membership, to be comprised of individuals who are
Continuing Directors.
(h.) "Code" means the Internal Revenue Code of 1986, as
amended.
(i.) "Committee" means any committee appointed by the Board to
administer the Plan.
(j.) "Common Stock" means the common stock of the Company.
(k.) "Company" means Cylink Corporation, a California
corporation.
(l.) "Consultant" means any person who is engaged by the
Company or any Related Entity to render consulting or advisory services as an
independent contractor and is compensated for such services.
(m.) "Continuing Directors" means members of the Board who
either (i) have been Board members continuously for a period of at least
thirty-six (36) months or (ii) have been Board members for less than thirty-six
(36) months and were elected or nominated for election as Board members by at
least a majority of the Board members described in clause (i) who were still in
office at the time such election or nomination was approved by the Board.
(n.) "Continuous Status as an Employee, Director or
Consultant" means that the provision of services to the Company or a Related
Entity in any capacity of Employee, Director or Consultant, is not interrupted
or terminated. Continuous Status as an Employee, Director or Consultant shall
not be considered interrupted in the case of (i) any approved leave of absence
or (ii) transfers between locations of the Company or among the Company, any
Related Entity, or any successor in any capacity of Employee, Director or
Consultant. An approved leave of absence shall include sick
2
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of April, 1997
leave, military leave, or any other authorized personal leave. For purposes of
Incentive Stock Options, no such leave may exceed ninety (90) days, unless
reemployment upon expiration of such leave is guaranteed by statute or contract.
(o.) "Corporate Transaction" means any of the following
shareholder- approved transactions to which the Company is a party:
(i.) a merger or consolidation in which the Company
is not the surviving entity, except for a transaction the principal purpose of
which is to change the state in which the Company is incorporated;
(ii.) the sale, transfer or other disposition of all
or substantially all of the assets of the Company (including the capital stock
of the Company's subsidiary corporations) in connection with the complete
liquidation or dissolution of the Company; or
(iii.) any reverse merger in which the Company is the
surviving entity but in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding securities
are transferred to a person or persons different from those who held such
securities immediately prior to such merger.
(p.) "Covered Employee" means an Employee who is a "covered
employee" under Section 162(m)(3) of the Code.
(q.) "Director" means a member of the Board.
(r.) "Dividend Equivalent Right" means a right entitling the
Grantee to compensation measured by dividends paid with respect to Common Stock.
(s.) "Employee" means any person, including an Officer or
Director, who is an employee of the Company or any Related Entity. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(t.) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(u.) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
3
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of April, 1997
(i.) Where there exists a public market for the
Common Stock, the Fair Market Value shall be (A) the closing price for a Share
for the last market trading day prior to the time of the determination (or, if
no closing price was reported on that date, on the last trading date on which a
closing price was reported) on the stock exchange determined by the
Administrator to be the primary market for the Common Stock or the Nasdaq
National Market, whichever is applicable or (B) if the Common Stock is not
traded on any such exchange or national market system, the average of the
closing bid and asked prices of a Share on the Nasdaq Small Cap Market for the
day prior to the time of the determination (or, if no such prices were reported
on that date, on the last date on which such prices were reported), in each
case, as reported in The Wall Street Journal or such other source as the
Administrator deems reliable; or
(ii.) In the absence of an established market of the
type described in (i), above, for the Common Stock, the Fair Market Value
thereof shall be determined by the Administrator in good faith.
(v.) "Grantee" means an Employee, Director or Consultant who
receives an Award under the Plan.
(w.) "Incentive Stock Option" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code.
(x.) "Non-Qualified Stock Option" means an Option not intended
to qualify as an Incentive Stock Option.
(y.) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(z.) "Option" means a stock option granted pursuant to the
Plan.
(aa.) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(bb.) "Performance - Based Compensation" means compensation
qualifying as "performance-based compensation" under Section 162(m) of the Code.
(cc.) "Performance Shares" means Shares or an award
denominated in Shares which may be earned in whole or in part upon attainment of
performance
4
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of April, 1997
criteria established by the Administrator.
(dd.) "Performance Units" means an award which may be earned
in whole or in part upon attainment of performance criteria established by the
Administrator and which may be settled for cash, Shares or other securities or a
combination of cash, Shares or other securities as established by the
Administrator.
(ee.) "Plan" means this 1994 Flexible Stock Incentive Plan, as
amended and restated.
(ff.) "Related Entity" means any Parent, Subsidiary and any
business, corporation, partnership, limited liability company or other entity in
which the Company, a Parent or a Subsidiary holds an ownership interest,
directly or indirectly.
(gg.) "Restricted Stock" means Shares issued under the Plan to
the Grantee for such consideration, if any, and subject to such restrictions on
transfer, rights of first refusal, repurchase provisions, forfeiture provisions,
and other terms and conditions as established by the Administrator.
(hh.) "Rule 16b-3" means Rule 16b-3 promulgated under the
Exchange Act or any successor thereto.
(ii.) "SAR" means a stock appreciation right entitling the
Grantee to Shares or cash compensation, as established by the Administrator,
measured by appreciation in the value of Common Stock.
(jj.) "Share" means a share of the Common Stock.
(kk.) "Subsidiary" means a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code.
(ll.) "Subsidiary Disposition" means the disposition by the
Company of its equity holdings in any subsidiary corporation effected by a
merger or consolidation involving that subsidiary corporation, the sale of all
or substantially all of the assets of that subsidiary corporation or the
Company's sale or distribution of substantially all of the outstanding capital
stock of such subsidiary corporation.
3. Stock Subject to the Plan.
5
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of April, 1997
(a.) Subject to the provisions of Section 10, below, the
maximum aggregate number of Shares which may be issued pursuant to all Awards
(including Incentive Stock Options) is 5,950,000 Shares. The Shares to be issued
pursuant to Awards may be authorized, but unissued, or reacquired Common Stock.
(b.) If an Award expires or becomes unexercisable without
having been exercised in full, or is surrendered pursuant to an Award exchange
program, or if any unissued Shares are retained by the Company upon exercise of
an Award in order to satisfy the exercise price for such Award or any
withholding taxes due with respect to such Award, such unissued or retained
Shares shall become available for future grant or sale under the Plan (unless
the Plan has terminated). Shares that actually have been issued under the Plan
pursuant to an Award shall not be returned to the Plan and shall not become
available for future distribution under the Plan, except that if unvested Shares
are forfeited, or repurchased by the Company at their original purchase price,
such Shares shall become available for future grant under the Plan.
4. Administration of the Plan.
(a.) Plan Administrator.
(i.) Administration with Respect to Directors and
Officers. With respect to grants of Awards to Directors or Employees who are
also Officers or Directors of the Company, the Plan shall be administered by (A)
the Board or (B) a Committee designated by the Board, which Committee shall be
constituted in such a manner as to satisfy the Applicable Laws and to permit
such grants and related transactions under the Plan to be exempt from Section
16(b) of the Exchange Act in accordance with Rule 16b-3. Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board.
(ii.) Administration With Respect to Consultants and
Other Employees. With respect to grants of Awards to Employees or Consultants
who are neither Directors nor Officers of the Company, the Plan shall be
administered by (A) the Board or (B) a Committee designated by the Board, which
Committee shall be constituted in such a manner as to satisfy the Applicable
Laws. Once appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. The Board may authorize one or
more Officers to grant such Awards and may limit such authority as the Board
determines from time to time.
(iii.) Administration With Respect to Covered
Employees.
6
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of April, 1997
Notwithstanding the foregoing, grants of Awards to any Covered Employee intended
to qualify as Performance-Based Compensation shall be made only by a Committee
(or subcommittee of a Committee) which is comprised solely of two or more
Directors eligible to serve on a committee making Awards qualifying as
Performance-Based Compensation. In the case of such Awards granted to Covered
Employees, references to the "Administrator" or to a "Committee" shall be deemed
to be references to such Committee or subcommittee.
(iv.) Administration Errors. In the event an Award is
granted in a manner inconsistent with the provisions of this subsection (a),
such Award shall be presumptively valid as of its grant date to the extent
permitted by the Applicable Laws.
(b.) Powers of the Administrator. Subject to Applicable Laws
and the provisions of the Plan (including any other powers given to the
Administrator hereunder), and except as otherwise provided by the Board, the
Administrator shall have the authority, in its discretion:
(i.) to select the Employees, Directors and
Consultants to whom Awards may be granted from time to time hereunder;
(ii.) to determine whether and to what extent Awards
are granted hereunder;
(iii.) to determine the number of Shares or the
amount of other consideration to be covered by each Award granted hereunder;
(iv.) to approve forms of Award Agreement for use
under the Plan;
(v.) to determine the terms and conditions of any
Award granted hereunder;
(vi.) to amend the terms of any outstanding Award
granted under the Plan, including a reduction in the exercise price (or base
amount on which appreciation is measured) of any Award to reflect a reduction in
the Fair Market Value of the Common Stock since the grant date of the Award,
provided that any amendment that would adversely affect the Grantee's rights
under an outstanding Award shall not be made without the Grantee's written
consent;
(vii.) to construe and interpret the terms of the
Plan and Awards granted pursuant to the Plan;
7
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of April, 1997
(viii.) to establish additional terms, conditions,
rules or procedures to accommodate the rules or laws of applicable foreign
jurisdictions and to afford Grantees favorable treatment under such laws;
provided, however, that no Award shall be granted under any such additional
terms, conditions, rules or procedures with terms or conditions which are
inconsistent with the provisions of the Plan; and
(ix.) to take such other action, not inconsistent
with the terms of the Plan, as the Administrator deems appropriate.
(c.) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be conclusive and
binding on all persons.
5. Eligibility. Awards other than Incentive Stock Options may be
granted to Employees, Directors and Consultants. Incentive Stock Options may be
granted only to Employees of the Company, a Parent or a Subsidiary. An Employee,
Director or Consultant who has been granted an Award may, if otherwise eligible,
be granted additional Awards. Awards may be granted to such Employees, Directors
or Consultants who are residing in foreign jurisdictions as the Administrator
may determine from time to time.
6. Terms and Conditions of Awards.
(a.) Type of Awards. The Administrator is authorized under the
Plan to award any type of arrangement to an Employee, Director or Consultant
that is not inconsistent with the provisions of the Plan and that by its terms
involves or might involve the issuance of (i) Shares, (ii) an Option, a SAR or
similar right with an exercise or conversion privilege at a fixed or variable
price related to the Common Stock and/or the passage of time, the occurrence of
one or more events, or the satisfaction of performance criteria or other
conditions, or (iii) any other security with the value derived from the value of
the Common Stock or other securities issued by a Related Entity. Such awards
include, without limitation, Options, SARs, sales or bonuses of Restricted
Stock, Dividend Equivalent Rights, Performance Units or Performance Shares, and
an Award may consist of one such security or benefit, or two or more of them in
any combination or alternative.
(b.) Designation of Award. Each Award shall be designated in
the Award Agreement. In the case of an Option, the Option shall be designated as
either
8
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of April, 1997
an Incentive Stock Option or a Non-Qualified Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of Shares subject to Options designated as Incentive Stock Options which
become exercisable for the first time by a Grantee during any calendar year
(under all plans of the Company or any Parent or Subsidiary) exceeds $100,000,
such excess Options, to the extent of the Shares covered thereby in excess of
the foregoing limitation, shall be treated as Non- Qualified Stock Options. For
this purpose, Incentive Stock Options shall be taken into account in the order
in which they were granted, and the Fair Market Value of the Shares shall be
determined as of the date the Option with respect to such Shares is granted.
(c.) Conditions of Award. Subject to the terms of the Plan,
the Administrator shall determine the provisions, terms, and conditions of each
Award including, but not limited to, the Award vesting schedule, repurchase
provisions, rights of first refusal, forfeiture provisions, form of payment
(cash, Shares, or other consideration) upon settlement of the Award, payment
contingencies, and satisfaction of any performance criteria. The performance
criteria established by the Administrator may be based on any one of, or
combination of, increase in share price, earnings per share, total shareholder
return, return on equity, return on assets, return on investment, net operating
income, cash flow, revenue, economic value added, personal management
objectives, or other measure of performance selected by the Administrator.
Partial achievement of the specified criteria may result in a payment or vesting
corresponding to the degree of achievement as specified in the Award Agreement.
(d.) Deferral of Award Payment. The Administrator may
establish one or more programs under the Plan to permit selected Grantees the
opportunity to elect to defer receipt of consideration upon exercise of an
Award, satisfaction of performance criteria, or other event that absent the
election would entitle the Grantee to payment or receipt of Shares or other
consideration under an Award. The Administrator may establish the election
procedures, the timing of such elections, the mechanisms for payments of, and
accrual of interest or other earnings, if any, on amounts, Shares or other
consideration so deferred, and such other terms, conditions, rules and
procedures that the Administrator deems advisable for the administration of any
such deferral program.
(e.) Award Exchange Programs. The Administrator may establish
one or more programs under the Plan to permit selected Grantees to exchange an
Award under the Plan for one or more other types of Awards under the Plan on
such terms and conditions as determined by the Administrator from time to time.
9
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of April, 1997
(f.) Separate Programs. The Administrator may establish one or
more separate programs under the Plan for the purpose of issuing particular
forms of Awards to one or more classes of Grantees on such terms and conditions
as determined by the Administrator from time to time.
(g.) Individual Option and SAR Limit. The maximum number of
Shares with respect to which Options and SARs may be granted to any Employee
under the Plan shall be 1,000,000 Shares. The foregoing limitation shall be
adjusted proportionately in connection with any change in the Company's
capitalization pursuant to Section 10, below. To the extent required by Section
162(m) of the Code or the regulations thereunder, in applying the foregoing
limitation with respect to an Employee, if any Option or SAR is canceled, the
canceled Option or SAR shall continue to count against the maximum number of
Shares with respect to which Options and SARs may be granted to the Employee.
For this purpose, the repricing of an Option (or in the case of a SAR, the base
amount on which the stock appreciation is calculated is reduced to reflect a
reduction in the Fair Market Value of the Common Stock) shall be treated as the
cancellation of the existing Option or SAR and the grant of a new Option or SAR.
(h.) Early Exercise. The Award may, but need not, include a
provision whereby the Grantee may elect at any time while an Employee, Director
or Consultant to exercise any part or all of the Award prior to full vesting of
the Award. Any unvested Shares received pursuant to such exercise may be subject
to a repurchase right in favor of the Company or to any other restriction the
Administrator determines to be appropriate.
(i.) Term of Award. The term of each Award shall be the term
stated in the Award Agreement, provided, however, that the term of an Incentive
Stock Option shall be no more than ten (10) years from the date of grant
thereof. However, in the case of an Incentive Stock Option granted to a Grantee
who, at the time the Option is granted, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided in
the Award Agreement.
(j.) Transferability of Awards. Incentive Stock Options may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Grantee, only by the Grantee; provided,
however, that the Grantee may designate a beneficiary of the Grantee's Incentive
Stock Option in the event of the
10
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of April, 1997
Grantee's death on a beneficiary designation form provided by the Administrator.
Other Awards shall be transferable to the extent provided in the Award
Agreement.
(k.) Time of Granting Awards. The date of grant of an Award
shall for all purposes be the date on which the Administrator makes the
determination to grant such Award, or such other date as is determined by the
Administrator. Notice of the grant determination shall be given to each
Employee, Director or Consultant to whom an Award is so granted within a
reasonable time after the date of such grant.
7. Award Exercise or Purchase Price, Consideration, Taxes and Reload
Options.
(a.) Exercise or Purchase Price. The exercise or purchase
price, if any, for an Award shall be as follows:
(i.) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time
of the grant of such Incentive Stock Option owns stock representing more than
ten percent (10%) of the voting power of all classes of stock of the Company or
any Parent or Subsidiary, the per Share exercise price shall be not less than
one hundred ten percent (110%) of the Fair Market Value per Share on the date of
grant.
(B) granted to any Employee other than an
Employee described in the preceding paragraph, the per Share exercise price
shall be not less than one hundred percent (100%) of the Fair Market Value per
Share on the date of grant.
(ii.) In the case of a Non-Qualified Stock Option,
the per Share exercise price shall be not less than eighty-five percent (85%) of
the Fair Market Value per Share on the date of grant.
(iii.) In the case of the sale of Shares:
(A) granted to a person who, at the time of
the grant of such Award, or at the time the purchase is consummated, owns stock
representing
11
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of April, 1997
more than ten percent (10%) of the voting power of all classes of stock of the
Company, the per Share purchase price shall be not less than one hundred percent
(100%) of the Fair Market Value per share on the date of grant.
(B) granted to any person other than a
person described in the preceding paragraph, the per Share purchase price shall
be not less than eighty-five percent (85%) of the Fair Market Value per Share on
the date of grant.
(iv.) In the case of Awards intended to qualify as
Performance- Based Compensation, the exercise or purchase price, if any, shall
be not less than one hundred percent (100%) of the Fair Market Value per Share
on the date of grant.
(v.) In the case of other Awards, such price as is
determined by the Administrator.
(b.) Consideration. Subject to Applicable Laws, the
consideration to be paid for the Shares to be issued upon exercise or purchase
of an Award including the method of payment, shall be determined by the
Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). In addition to any other types of
consideration the Administrator may determine, the Administrator is authorized
to accept as consideration for Shares issued under the Plan the following:
(i.) cash;
(ii.) check;
(iii.) delivery of Grantee's promissory note with
such recourse, interest, security, and redemption provisions as the
Administrator determines as appropriate;
(iv.) surrender of Shares or delivery of a properly
executed form of attestation of ownership of Shares as the Administrator may
require (including withholding of Shares otherwise deliverable upon exercise of
the Award) which have a Fair Market Value on the date of surrender or
attestation equal to the aggregate exercise price of the Shares as to which said
Award shall be exercised (but only to the extent that such exercise of the Award
would not result in an accounting compensation charge with respect to the Shares
used to pay the exercise price unless otherwise determined by the
Administrator);
(v.) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall
12
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of April, 1997
require to effect an exercise of the Award and delivery to the Company of the
sale or loan proceeds required to pay the exercise price; or
(vi.) any combination of the foregoing methods of
payment.
(c.) Taxes. No Shares shall be delivered under the Plan to any
Grantee or other person until such Grantee or other person has made arrangements
acceptable to the Administrator for the satisfaction of any foreign, federal,
state, or local income and employment tax withholding obligations, including,
without limitation, obligations incident to the receipt of Shares or the
disqualifying disposition of Shares received on exercise of an Incentive Stock
Option. Upon exercise of an Award, the Company shall withhold or collect from
Grantee an amount sufficient to satisfy such tax obligations.
(d.) Reload Options. In the event the exercise price or tax
withholding of an Option is satisfied by the Company or the Grantee's employer
withholding Shares otherwise deliverable to the Grantee, the Administrator may
issue the Grantee an additional Option, with terms identical to the Award
Agreement under which the Option was exercised, but at an exercise price as
determined by the Administrator in accordance with the Plan.
8. Exercise of Award.
(a.) Procedure for Exercise; Rights as a Shareholder.
(i.) Any Award granted hereunder shall be exercisable
at such times and under such conditions as determined by the Administrator under
the terms of the Plan and specified in the Award Agreement.
(ii.) An Award shall be deemed to be exercised when
written notice of such exercise has been given to the Company in accordance with
the terms of the Award by the person entitled to exercise the Award and full
payment for the Shares with respect to which the Award is exercised has been
received by the Company. Until the issuance (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote or
receive dividends or any other rights as a shareholder shall exist with respect
to Shares subject to an Award, notwithstanding the exercise of an Option or
other Award. The Company shall issue (or cause to be issued) such stock
certificate promptly upon exercise of the Award. No adjustment will be made for
a
13
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of April, 1997
dividend or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in the Award Agreement or Section 10,
below.
(b.) Exercise of Award Following Termination of Employment,
Director or Consulting Relationship.
(i.) An Award may not be exercised after the
termination date of such Award set forth in the Award Agreement and may be
exercised following the termination of a Grantee's Continuous Status as an
Employee, Director or Consultant only to the extent provided in the Award
Agreement.
(ii.) Where the Award Agreement permits a Grantee to
exercise an Award following the termination of the Grantee's Continuous Status
as an Employee, Director or Consultant for a specified period, the Award shall
terminate to the extent not exercised on the last day of the specified period or
the last day of the original term of the Award, whichever occurs first.
(iii.) Any Award designated as an Incentive Stock
Option to the extent not exercised within the time permitted by law for the
exercise of Incentive Stock Options following the termination of a Grantee's
Continuous Status as an Employee, Director or Consultant shall convert
automatically to a Non-Qualified Stock Option and thereafter shall be
exercisable as such to the extent exercisable by its terms for the period
specified in the Award Agreement.
(c.) Buyout Provisions. The Administrator may at any time
offer to buy out for a payment in cash or Shares, an Award previously granted,
based on such terms and conditions as the Administrator shall establish and
communicate to the Grantee at the time that such offer is made.
9. Conditions Upon Issuance of Shares.
(a.) Shares shall not be issued pursuant to the exercise of an
Award unless the exercise of such Award and the issuance and delivery of such
Shares pursuant thereto shall comply with all Applicable Laws, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
(b.) As a condition to the exercise of an Award, the Company
may require the person exercising such Award to represent and warrant at the
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares
if, in the opinion of counsel for the Company, such a representation is required
by any Applicable Laws.
14
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of April, 1997
10. Adjustments Upon Changes in Capitalization. Subject to any required
action by the shareholders of the Company, the number of Shares covered by each
outstanding Award, and the number of Shares which have been authorized for
issuance under the Plan but as to which no Awards have yet been granted or which
have been returned to the Plan, as well as the price per share of Common Stock
covered by each such outstanding Award, shall be proportionately adjusted for
any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock, or any other similar event resulting in
an increase or decrease in the number of issued shares of Common Stock. Except
as expressly provided herein, no issuance by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason hereof shall be made with respect to, the
number or price of Shares subject to an Award.
11. Corporate Transactions/Changes in Control/Subsidiary Dispositions.
Except as may be provided in an Award Agreement:
(a.) Effective upon the consummation of a Corporate
Transaction, all outstanding Awards under the Plan shall terminate unless
assumed by the successor company or its Parent as provided below. For the
purposes of this subsection, the Award shall be considered assumed if, following
the Corporate Transaction, the Award confers, for each Share subject to the
Award immediately prior to the Corporate Transaction, (i) the consideration
(whether stock, cash, or other securities or property) received in the Corporate
Transaction by holders of Common Stock for each Share subject to the Award held
on the effective date of the Corporate Transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares), or (ii) the right to purchase such
consideration in the case of an Option or similar Award; provided, however, that
if such consideration received in the Corporate Transaction was not solely
common stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the consideration to
be received upon the exercise or exchange of the Award for each Share subject to
the Award to be solely common stock of the successor corporation or its Parent
equal in fair market value to the per share consideration received by holders of
Common Stock in the Corporate Transaction.
(b.) In the event of a Change in Control (other than a Change
in Control which also is a Corporate Transaction), each Award which is at the
time outstanding under the Plan shall remain exercisable until the expiration or
sooner termination of the applicable Award term.
15
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of April, 1997
(c.) In the event of a Subsidiary Disposition, each Award with
respect to those Grantees who are at the time engaged primarily in Continuous
Status as an Employee or Consultant with the subsidiary corporation involved in
such Subsidiary Disposition which is at the time outstanding under the Plan
shall remain so exercisable until the expiration or sooner termination of the
Award term.
(d.) The portion of any Incentive Stock Option accelerated
under the terms of the Award Agreement in connection with a Corporate
Transaction, Change in Control or Subsidiary Disposition shall remain
exercisable as an Incentive Stock Option under the Code only to the extent the
$100,000 dollar limitation of Section 422(d) of the Code is not exceeded. To the
extent such dollar limitation is exceeded, the accelerated excess portion of
such Option shall be exercisable as a Non-Qualified Stock Option.
12. Term of Plan. The Plan shall terminate with respect to the grant of
Incentive Stock Options on January 28, 2004, unless sooner terminated.
13. Amendment, Suspension or Termination of the Plan.
(a.) The Board may at any time amend, suspend or terminate the
Plan. To the extent necessary to comply with Applicable Laws, the Company shall
obtain shareholder approval of any Plan amendment in such a manner and to such a
degree as required.
(b.) No Award may be granted during any suspension of the Plan
or after termination of the Plan.
(c.) Any amendment, suspension or termination of the Plan
shall not affect Awards already granted, and such Awards shall remain in full
force and effect as if the Plan had not been amended, suspended or terminated,
unless mutually agreed otherwise between the Grantee and the Administrator,
which agreement must be in writing and signed by the Grantee and the Company.
14. Reservation of Shares.
(a.) The Company, during the term of the Plan, will at all
times reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
16
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of April, 1997
(b.) The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
15. No Effect on Terms of Employment. The Plan shall not confer upon
any Grantee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate his or her employment or consulting
relationship at any time, with or without cause.
16. Shareholder Approval. The Plan became effective when adopted by the
Board on February 1, 1994, and was approved by the Company's shareholders on
April 4, 1994. On January 26, 1995, and in November, 1995, the Board adopted and
approved an amendment and restatement, respectively, of the Plan that was
approved by the Company's shareholders on January 15, 1996. On April ___, 1997,
the Board again adopted and approved an amendment and restatement of the Plan to
reflect the amendments promulgated by the Securities and Exchange Commission to
Rule 16b-3 applicable to the Plan, to increase the maximum aggregate number of
Shares that may be issued pursuant to Awards, to permit the grant of Dividend
Equivalent Rights, SARs, Performance Units and Performance Shares, to address
the rules or laws of foreign jurisdictions applicable to Awards granted to
residents therein, to permit Awards to include an early exercise provision, to
increase the maximum number of Shares with respect to which Options and SARs may
be granted to any Employee in any calendar year (such increase to be effective
as of November 6, 1996, to address the exercisability of Awards held by Grantees
who are Employees or Consultants of a subsidiary corporation of the Company that
is the subject of a Subsidiary Disposition, and to authorize the establishment
under the Plan of separate programs for the grant of particular forms of Awards
to one or more classes of Grantees, and programs to permit selected Grantees to
elect to defer the receipt of consideration payable under an Award,
(collectively, the "Amendments"), subject to shareholder approval of the
Amendments. Awards may be granted in reliance on the per employee maximum share
increase and the formula increase, but no Award issued in reliance on such
increases shall become exercisable unless and until the Amendments shall have
been approved by the Company's shareholders. If such shareholder approval is not
obtained, then the Awards previously granted in reliance on the Amendments shall
terminate. None of the other Amendments shall be given effect until they shall
have been approved by the Company's shareholders.
17
